The Eastern District Of Michigan Holds That An Arbitration Clause Does Not Apply To Direct Purchasers In A Private Suit Alleging Price-Fixing
02/12/2019On January 29, 2019, the Honorable Judge Marianne O. Battani of the United States District Court for the Eastern District of Michigan denied without a hearing Defendant KYB Corporation’s and KYB America’s (collectively, the “Company”) motion to dismiss all federal antitrust claims because those claims were subject to an arbitration clause. In re Shock Absorbers, Master File No. 12-md-02311 (E.D. Mich. Jan. 29, 2019). In so finding, the Court denied the Company’s 30(b)(1) motion and concluded that the Court had subject matter jurisdiction.
Plaintiffs brought the action on behalf of a class of direct purchaser plaintiffs (“DPPs”) resellers who purchased aftermarket shock absorbers for resale direct to consumers. Plaintiffs alleged that a number of manufacturers of shock absorbers engaged in antitrust violations related to their sale of shock absorbers during period January 1, 1995, though December 31, 2012. This case is one of many similar civil follow-on suits in the auto parts industry alleging violations of the antitrust laws for price-fixing and bid-rigging.
The Company moved to dismiss DPPs’ claims on the basis that all purchases of shock absorbers are subject to a Limited Warranty that warrants that the products are free from defects and limits the liability of the Company to the “exchange/replacement of a defective covered [ ] product.” Id. at 2-3. The Limited Warranty contains procedures on how to make a claim of a defective product and contains a Resolution Process-Binding Arbitration provision (the “Arbitration Provision”) which states that “[a]ny disagreement, dispute, controversy or claim arising out of or relating to this Limited Warranty or the [Company] product(s) must be brought in the original retail purchaser’s individual capacity and shall be settled by binding bilateral arbitration located in Indiana.” Id. at 3. The provision also indicates that the “original retail purchaser will not be able to bring a lawsuit for any dispute relating to the covered products” and indicates that the appropriate applicable rules are the “Rules of the American Arbitration Association (AAA) and the Federal Arbitration Act (FAA).” Id.
The Court evaluated two questions in determining the applicability of the Arbitration Provision: (1) who had the power to decide whether arbitration applied and (2) whether the DPPs were party to the Arbitration Provision. The Court, in reviewing the allegations, noted that federal policy generally favors arbitration and that any doubts about whether an issue is arbitrable should be resolved in favor of arbitration.
Looking to the first question, the Court determined that it—rather than the arbitrator—had the power to determine if arbitration applied. The Court stated that this issue “turns on whether the parties agreed to arbitrate that specific issue,” and that courts should not assume that there is such an agreement without clear and unmistakable evidence. The Court rejected the Company’s argument that the issue of arbitrability should be decided by the arbitrator because the applicable AAA rules “expressly grants to the arbitrator ‘the power to rule on his or her jurisdiction,’” finding that this issue had not been settled by the Supreme Court or Sixth Circuit. In any event, it was unclear to the Court that there was an agreement between the parties to arbitrate any disputes.
Turning to the second question, the Court concluded that the plain terms the Limited Warranty only created a warranty between the Company and the original retail purchasers. No agreement existed between the Company and the DPPs to arbitrate any dispute. The Court found that the Limited Warranty was a pass-through warranty between the Company and the original retail purchasers. Accordingly, the DPPs—as pass-through purchasers and authorized product resellers, not retail purchasers—were not a party to the Limited Warranty. The Court also rejected the Company’s secondary argument. It argued that the Limited Warranty was incorporated by reference into a separate warranty service provision agreed to by the DPPs. The Court, however, found that the DPPs’ agreement to service the warranty did not render them parties to the arbitration agreement contained in the Limited Warranty.
This case creates at least two important takeaways to apply going forward: (1) arbitration remains strongly favored as a preferred method of resolution when the parties to a dispute agree to submit their concerns to an arbitrator, and (2) the underlying facts, including the language and actions of the parties, is significant to determine whether such an arbitration agreement exists. In both instances, this counsels toward more definitive arbitration language in contracts, terms and conditions, warranties, and other potential agreements.